it is time that we get this bill done. We have a number of distinguished witnesses today. I would like to first welcome Treasury Secretary Robert Rubin. I appreciate Secretary Rubin's commitment to the Community Reinvestment Act, and I look forward to hearing his views today. Like Secretary Rubin, we should oppose efforts to roll back protection of CRA. I would also like to welcome Insurance Commissioner Nicholas and SEC Chairman Levitt. Protecting consumers is an important part of any financial service bill. We will consider your views very, very carefully. This committee has historically supported functional regulation, which is the idea that the same product is regulated by the same rules regardless of who is selling the product. This seems to me to be common sense. We cannot want a system in which industries shop around for the friendliest regulator. I would also like to welcome the representatives from the industry, which are on the financial panel. Glass-Steagell has been a barrier to competition for much too long. The benefits of increased competition will accrue, and then it will make our financial firms stronger internationally. We recognize that you need the legislation and look forward to hearing your views. In the last Congress, this committee took the lead on financial service legislation. We took legislation that had little support; and working together, we made changes that enabled the legislation to pass the House for the first time in 65 years. In the coming weeks, we will craft a substitute to H.R. 10. I look forward to working with Chairman Bliley, and I look forward to working with the chairman of the subcommittee, Congressman Oxley, and, of course, Mr. Dingell, who is the ranking member of the full committee to make certain that we have legislation that, when we finish at the end of the day, we will all be proud of. Thank you very much, Mr. Chairman, I yield back. Mr. OXLEY. The gentleman yields back. The Chair now recognizes the gentleman from Richmond, the chairman of the full Commerce Committee, Mr. Bliley. Chairman BLILEY. Thank you, Mr. Chairman. I too want to welcome our two colleagues, the gentleman from Louisiana and the lady from New Jersey. And I know it will disappoint you, but I put my statement in the record. [The prepared statement of Hon. Tom Bliley follows:] PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE Today the Subcommittee on Finance and Hazardous Materials holds its second hearing on H.R. 10, the Financial Services Act of 1999. This legislation is important to the future of the securities, insurance, and banking industries. Removing statutory and regulatory barriers to competition will improve the efficiency for financial service providers. The efficiency will translate to greater services and lower costs for consumers and providers. But only if it is done right. I have been committed to deregulatory legislation for other industries provided that the legislation does not bestow competitive advantages to one market segment over another. It is not the government's role to choose winners and losers through the legislative process, nor is it the role of regulators. Unfortunately, this has been the case in the financial services industry. In large part this has been the case to date. Banks enjoy a lower cost of capital than non-banks through deposit insurance, access to the discount window, and access to the Federal Reserve payment system. This would not be a competitive ad vantage if banks were confined to competing with one another and not with securities and insurance firms, as stipulated in the Glass Steagall Act. However, in the past two decades, banking regulators have interpreted the statutes in a manner to allow banks to begin competing with securities and insurance firms. The very activities that banks were originally supposed to be prohibited from conducting are now offered through affiliates, and in some cases directly through the banks. This erodes the salutary effect of fair competition. Securities and insurance inns are still unable to own a bank, and do not share the funding advantages of banks. As a result, banks are acquiring securities firms at an alarming rate and reducing the competition that we seek to increase. While I am in favor of providing the corporate community flexibility to choose the structure that optimizes their strategic plans, I do not favor legislating a structure, such as the operating subsidiary, that provides competitive advantages for banks over their independent competitors. Additionally, there remain serious policy concerns about the consequences to the taxpayers of permitting new, risky activities in the subsidiary of a bank. I remain unconvinced of the need to gamble with an untested model that has proved disastrous in other economies. I have received additional analysis on the question of operating subsidiaries from Federal Reserve Chairman Greenspan, and I ask unanimous consent to include this analysis in the record. In this regard, I share the concerns expressed by Chairman Greenspan at our hearing last week. I look forward to the testimony of our witnesses today, including Secretary Rubin, and learning more about this most important issue. Another issue of concern to this Committee is the provision of consistent regulation for financial products, regardless of where the financial activity is conducted. In this regard, I look forward to the comments of Chairman Levitt and Commissioner Nichols. I am also grateful to the witnesses on the fourth panel who will present industry views to financial services modernization. I would also like to welcome our guests on the first panel today, our colleagues from the Banking Committee: the Gentleman from Louisiana and Chairman of the Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises, Richard Baker, and the Gentlelady from New Jersey and Chairwoman of the Subcommittee on Financial Institutions and Consumer Credit, Marge Roukema. Mr. Chairman, I commend you, for holding this hearing and I look forward to working with you to improve this legislation. 2. What's the Treasury's position on allowing subsidiaries ....... 3. Page 4. 5. 6. Would the risks of activities conducted in a subsidiary adversely parent bank? . . . . . . How would allowing new financial activities in 2 7 7 11 7. Are some proposed financial activities so inherently risky 8. Do American banks have experience conducting nonbanking Did the thrift debacle result from allowing new financial Do bank holding companies face higher borrowing costs 15 11. Is allowing new financial activities in subsidiaries consistent 15 12. What about the risk of a future Congress loosening applicable 16 1. What's the difference between a subsidiary and an affiliate of a bank? Operating subsidiaries are direct subsidiaries of a bank. Accordingly, any losses (or gains) of an operating subsidiary directly impact the net worth, financial condition and profits of the parent bank. Losses of an operating subsidiary must be immediately and fully reflected in the consolidated financial statements of the parent bank under generally accepted accounting principles (GAAP). Holding company affiliates are not subsidiaries of a bank, but instead are subsidiaries of an uninsured holding company. Accordingly, any losses incurred by an affiliate do not directly impact the financial condition of an affiliated FDIC-insured bank. Instead, the losses are borne by the uninsured parent holding company and reflected in the uninsured holding company's consolidated financial statements. This difference is critical and demonstrates why the holding company structure better protects the safety and soundness of insured banks and the federal deposit insurance funds. 2. What's the Treasury's position on allowing subsidiaries to engage in financial activities? The Treasury Department would permit operating subsidiaries of national banks to engage as principal in activities that Congress has long forbidden national banks to conduct directly. For example, Treasury would allow operating subsidiaries to underwrite and deal in all types of equity and debt securities and to engage in merchant banking activities. Since the major business of merchant banks is to make equity investments in other firms, operating subsidiaries of national banks could acquire interests in, including full ownership of, commercial firms under Treasury's proposal. Although the Treasury initially proposed to permit operating subsidiaries of national banks to underwrite all types of insurance (including property and casualty insurance), the Treasury recently conceded that operating subsidiaries:could be prohibited from 2 engaging in these activities. In addition, the Treasury has consistently stated that operating subsidiaries should not be authorized to engage in real estate investment and development activities, presumably in recognition of the substantial losses that these activities have already caused taxpayers in previous thrift and banking crises and the great risks involved with these activities generally. 3. Would the risks of activities conducted in a subsidiary adversely affect the safety and soundness of the parent bank? Yes. Any losses incurred by an operating subsidiary have a negative economic impact on the parent bank. When an operating subsidiary loses money, the value of the bank's investment in the subsidiary is reduced, just as losses on loans reduce the value of the bank's assets. This economic impact is immediately and fully reflected—as lower earnings and lower capital at the parent bank—in the consolidated financial statements of the parent bank under GAAP. In fact, an operating subsidiary's losses could significantly exceed the bank's investment in the subsidiary and all of these losses must be reflected in the parent bank's consolidated financial statements under GAAP. The numerous counterparties that enter into financial transactions with, or provide funding to, a bank on a daily basis (e.g. derivative, repurchase, foreign currency, and inter-bank lending counterparties) evaluate the bank's capital, earnings and GAAP financial statements when determining whether to engage in transactions with the bank and at what price. As a result, losses at an operating subsidiary can have a significant impact on the parent bank's liquidity and cost of funds. Because of these connections, a parent bank has a strong incentive to provide financial support to a troubled subsidiary. These incentives explain why banks may provide extensive financial support to a troubled subsidiary even though the bank is under no legal obligation to do so, and even where the amount of assistance exceeds |